Are There Policy Lessons From the So-Called Southeast Asian Model? Noelle Rodriguez Freelance social and history researcher Via della Piramide Cestia 63, Palazzina C, Interno 9, 00153 Roma, Italy Anis Chowdhury1 Ex-Professor of Economics, University of Western Sydney, Australia; currently working as Director, Macroeconomic Policy and Development Division of UNESCAP, Rajdamnern Nok Avenue, Bangkok 10200, Thailand Corresponding author: [email protected] [Submitted June 2013, Accepted September 2013] Abstract. The extraordinary transformation of East and Southeast Asian economies during the past four decades has produced a tendency to see East and Southeast Asia as a much more economically coherent region than it actually is, and a corresponding tendency to see economic progress in East and Southeast Asia as similar in origin and nature. This paper casts doubts on the idea of a monolithic East Asian model and argues that there have been significant differences between East and Southeast Asian development experiences. In the case of East Asia, the State or Government played a much more active role than in pthe case of Southeast Asia which benefited more from luck or coincidence of favorable events than conscious policy actions. Southeast Asia’s development outcome is also inferior to that of East Asia in terms of growth, structural transformation and equity, and hence durability. Thus, this paper takes a much more nuanced view and attempts to discern policy lessons from the differences rather than similarities among them. Keywords: High-performing Asian Economies, types of state interventions, industrialization, poverty reduction. JEL codes: O11, I38 Introduction The phenomenal transformation of East and Southeast Asian economies during the past four decades has produced a tendency to see East Asia as a much more economically coherent region than it actually is, and a corresponding tendency to see economic progress in the region as similar in origin and nature. Terms such as the ‘Far East’, ‘Asia-Pacific’, ‘Pacific Asia’, ‘East Asia’, ‘Asian miracle’, ‘yen bloc’, ‘flying geese’, ‘tigers’, ‘mini-dragons’ and so on have tended to encourage this perception of the region.2 Generalization of East and Southeast Asian experience has also led to the 1 Views expressed herein do not reflect the views of ESCAP or UN Secretariat or any other UN agencies. 2 One such early attempt to generalize East Asian experience was by Milton Friedman and his wife Rose Friedman. Their popular television presentation, Free to Choose, later published as a book, was based on what they have seen mainly in Hong Kong. He narrated a number of success and failure stories in history, which they attributed to capitalism or the lack thereof. However, the tone for such a free market view was set in the seminal work of Ian Little, Tibor Scitovsky and Morris Scott (1970). Others, such as Federic Deyo (1980), Stephan Haggard (1987, 2004) Robert Wade (1990), Alice Amsden (1989) and Ha Joon Chang (2006), using various strands of political economy ASEAN Journal of Economics, Management and Accounting 1 (1): 1-12 (June 2013) ISSN 2338-9710 belief, especially among the proponents of “free market views” that sustained poverty reduction takes place in any country where three pre-conditions -- adequate macroeconomic management; economic freedom for peasants and small entrepreneurs; pro-poor, pro-rural public spending – hold. This paper casts doubts on the idea of a monolithic East Asian model and argues that there have been significant differences between East and Southeast Asian development experiences. In the case of East Asia, the State or Government played a much more active role than in the case of Southeast Asia which benefited more from luck or coincidence of favourable events than conscious policy actions. Southeast Asia’s development outcome is also inferior to that of East Asia in terms of growth, structural transformation and equity, and hence durability. Thus, this paper takes a much more nuanced view and attempts to discern policy lessons from the differences rather than similarities among them. Southeast Asian Development: Myth vs. Realities The most important and influential document recognizing the rapid growth, structural change and industrialization of much of East Asia in the last three decades or more has been the World Bank’s (1993) The East Asian Miracle. The study was commissioned following the region’s rapid growth and structural change in sharp contrast to the dismal experience with structural adjustment programmes (SAPs) in Latin America, Africa and other parts of the world, even resulting in severe recessions in several of these economies, and rather slow and unimpressive growth rates elsewhere, resulting in the so-called ‘lost decade’ of the 1980s. The study identified eight high-performing Asian economies: Japan, the four first- generation newly industrializing economies (NIEs) or countries (NICs), dragons or tigers, namely South Korea, Taiwan, Hong Kong and Singapore and the three second- generation Southeast Asian NICs, namely Malaysia, Thailand and Indonesia. Importantly, China was left out. The Bank study recognized that the likelihood of eight relatively contiguous economies growing so rapidly for such a sustained period of time was less than one in 60,000. Yet, it does not acknowledge the significance of geography – unlike the later 1997 Emerging Asia (EA) study led by the now defunct Harvard Institute of International Development (HIID) for the Asian Development Bank (ADB 1997). The Miracle study appears to have shifted the World Bank’s position from its market fundamentalism of the mid-1980s to acknowledging an important developmental role for the state in the 1990s. This impression has been reinforced by other Bank activities and publications, especially the 1997 World Development Report advocating effective – rather than minimalist – states (World Bank 1997), Development in the 1990s and more recently, the work of the Growth Commission, housed at the Bank. The Miracle study identified at least seven types of state interventions, which it saw as having been very important in East Asia. It approves of the following four, deemed functional interventions: (a) ensuring macroeconomic discipline and macroeconomic balances; (b) providing physical and social infrastructure; (c) providing good governance more generally; and (d) raising savings and investment rates. Meanwhile, the four functional interventions were said to compensate for market failures, and are, hence, deemed necessary and less distortive of markets. However, the approach, highlighted the role of state in the late industrialization of East Asia. Their emphasis includes attenuation of labor rights, government-business relations, control of the financial sector and active industrial and policies. As such these economies are described as “developmental state” –a term first coined by Chalmers Johnson (1982). 2 ASEAN Journal of Economics, Management and Accounting study was more sceptical of the three deemed strategic interventions, considered to be more market-distortive, namely directed (i.e. subsidized) credit, international trade policy and industrial policy interventions. It is interesting to compare what actually happened in Southeast Asia with the way the World Bank presented this. There is very little disagreement that maintaining macroeconomic balances was important in East Asia. But the acceptable parameters of macroeconomic discipline may be disputed. For instance, inflation was generally kept under 20 per cent in the high-performing Asian economies (HPAEs, the World Bank study’s preferred term), but it certainly was not always kept below 10 per cent as suggested by the Bank. Single digit inflation was neither a policy priority nor always ensured in some HPAEs (notably South Korea and Indonesia) during their high-growth periods. Similarly, the fiscal balance and the current account of the balance of payments were not always strictly maintained. Malaysia and Thailand had relatively high current account deficits throughout the 1990s, while other countries with much lower deficits were not spared the 1997 currency attacks and massive depreciation. In pursuing these supposedly functional interventions, the East Asian governments were not just market conforming, but instead played important roles which have been more than simply market augmenting. Clearly, this is not in line with the Washington Consensus. On the more controversial, so-called strategic interventions, the Bank grudgingly concedes that only financial interventions were successful in East Asia, particularly in Northeast Asia – i.e. in Japan, Korea and Taiwan. However, the Bank implies that nobody else is capable of successfully pursuing the policies that the Northeast Asians successfully implemented because state capabilities in Northeast Asia were unique and are non-replicable. Creating the conditions for attracting foreign investment, -- rather than liberalizing financial markets -- has had much more to do with reforming incentives and governance more generally to attract such investments. Southeast Asian governments, notably Singapore and Malaysia, have especially sought to attract FDI into areas where indigenous industrial capabilities were not expected to become internationally competitive. Attracting FDI should, however, be distinguished from capital account liberalization, which has come under renewed consideration after the East Asian financial crisis. The 1997-98 crisis was precipitated by an eventually